Whether you rent or own, it’s important to protect the place you call home – and everything inside it.
That’s where these two types of property insurance – homeowners insurance and renters insurance – come into play. As the names suggest, they cover damages to your property and possessions for each respective living situation.
Like any other type of insurance, it’s critical that you understand what is and is not covered when you buy a homeowners insurance or renters insurance policy. The worst time to discover gaps in your coverage is when you go to file a claim. That's why it’s important to assess all of your potential risks and look for the appropriate coverage.
Now maybe you're still in residency, and renting is the most cost-effective option. But when it comes time to buy your first home, you will need to upgrade your insurance coverage as well.
To help you along the way, here is a side-by-side comparison of renters and homeowners insurance (including why you need to have one or the other).
What does homeowners insurance cover?
Securing homeowners insurance is a key step in the home-buying process. You will want to have a policy in place the day you close on your home.
If you borrow a mortgage loan to buy your house, your lender will actually require that you do purchase a homeowners insurance policy worth at least a minimum amount. Because the property secures the loan, the lender has a vested interest in insuring it against major losses. That's how your lender will protect their stake in your home.
As you may expect, homeowners insurance offers much more complete coverage than renters insurance. Since you own the property, your homeowners policy will cover any external damage to it. Standard homeowners policies cover the cost of repairing or replacing damaged property, including:
- The main residence.
- Detached garages.
Your homeowners policies will also cover loss or damage to the contents of your home, including:
In fact, your policy may even cover possessions that are not stored in your home at the time of loss or damage. This may include:
- Items in a storage unit.
- Jewelry lost or stolen while on vacation.
- Your children’s possessions while they’re away at college.
- A set of golf clubs stolen from your car while it is parked at your office.
If you’re displaced from your home by a covered event, a homeowners policy will typically pay some of the cost for temporary housing and living expenses. While policies vary, they typically cover losses to structures and content caused by:
- Tornado or wind damage, but not hurricanes.
- Riots or civil unrest.
- Volcanic eruption.
- Falling aircraft or aircraft parts.
In addition, you can often upgrade your policy to covers other occurrences, such as:
- Power surges.
- The weight of ice, snow, or sleet.
- Damage caused by wild animals.
- Items that fall from the sky, such as satellites or meteors.
- Internal flooding caused by appliances, plumbing, HVAC, or sprinkler system.
Homeowners policies usually do not cover lost wages or business income incurred if you’re dealing with the aftermath of a house fire or other damage. You will also not likely be covered by a standard policy for loss or damage caused by:
- Sewer backups and sump pump failure.
- Mold damage.
- Mudslides and landslides
- Sinkholes and other ground movement
- Termite damage.
- Nuclear accidents.
If you live in an area at risk for floods, earthquakes and/or hurricanes, you should purchase a separate policy that covers those specific events.
Given the additional items it covers, homeowners insurance costs much more than renters insurance. Adding to the cost is that homeowners typically have more personal belongings than renters do.
What does renters insurance cover?
While some landlords may require renters insurance, it's not very common. However, it’s still a very smart investment if you live in an area prone to:
- Inclement weather.
- Natural disasters.
- Higher crime.
Renters insurance will reimburse you for the cost of possessions lost or damaged while on a rented property. Since you don’t own the home or apartment you rent, renters insurance does not cover the structure.
This includes damage resulting from:
- Severe winds.
- Water leaks.
Personal possessions covered by renters insurance includes:
- Computers and other electronics.
- Other valuables.
If you own the appliances within the rental property, your policy will cover those as well. Renters insurance can also cover the cost of renting elsewhere until your property is either repaired or you move to a new one.
Rarely will renters insurance policies cover possessions not stored in your home at the time of loss or damage.
Similarities between homeowners insurance and renters insurance
Although there are no shortage of differences between these two types of property insurance, there are also several similarities worth noting:
- The liability component.
- Actual cash value vs. replacement value.
- Exclusions and deductibles.
One of the key components of both renters and homeowners insurance is the liability component. It protects you against large losses due to accidents or negligence. For example, it can cover your liability if someone suffers an injury in your residence.
Another commonality is how homeowners and renters insurance assess the value of your belongings. Under renters and homeowners insurance, there are two options:
- Actual cash value.
- Replacement value.
Under an actual cash value policy, the insurer reimburses you based on the value of the items at the time of the loss. On the other hand, a replacement value policy will cover the cost to fully restore your belongings. While replacement value policies are more expensive than actual cash value policies, you also get a lot more coverage – whether it is renters or homeowners.
Another similarity is that there are exclusions to what both types of policy will cover. Neither renters or homeowners provide coverage for floods or earthquakes. (As mentioned previously, this requires a separate flood insurance or earthquake insurance policy.)
Both types of policies will also probably have deductibles. This is the amount you must pay for any damages or claims before your insurance coverage kicks in.
For example, say your policy has a $500 deductible. If you file a claim for $1,500, you will pay the first $500. Then the insurance company will cover the remaining $1,000.
How are homeowners insurance rates determined?
As you shop for a new home, the overall cost of ownership should be top-of-mind. This includes:
- The principal and interest on your mortgage payment.
- Applicable homeowners association dues.
- Property taxes.
Another important cost you need to account for is the cost of your property insurance.
It should come as no surprise that the cost of homeowners insurance is based on the amount of risk you pose to the carrier. (That's just how insurance companies operate — regardless of what it covers.)
Insurers will assess the likelihood of a homeowner filing a claim and the potential amount of claims. The greater the risk to the insurance company, the higher the premium you will pay.
This risk assessment process looks at not only the property being insured, but the property owner as well. The factors that will most affect your insurance rates can be divided in four categories:
- Property location.
- Property structure.
- Contents of the home.
- Homeowner characteristics.
How property location influences rates
Location, location, location. It's a key factor in determining your home’s value. But it will also greatly impact your property insurance rates.
Insurers will assess the location of your home for any of the following potential risks:
- Crime rate. Insurers will pay close attention to the risk of theft and vandalism, for which they would have to pay claims.
- Claims rate. Your insurance company may charge you more simply because you live in an area with an above average instance of claims.
- Proximity to a fire department. Living close to a fire department can help reduce fire damage risk. The further away you are from fire response crews, the more likely of incurring a total loss.
- The extent of adverse weather. Living on the coast brings greater risk for hurricane damage, while certain parts of the country are prone to damage from tornados, strong winds, lightning, hail, and heavy snow. If you live in areas that receive ice and snow, your risk of having people fall and get injured on your property increases.
- Risk of other natural disasters. Insurers will assess your risk of suffering earthquake damage. Living near forested areas can bring greater risk of wildfire damage.
- Cost of replacement. If your policy provides for full replacement of a damaged or destroyed property, you may also pay a premium if home construction costs in your area are higher due to the cost and availability of materials and labor.
How the property itself influences rates
The main factor in determining your home insurance rates is the size and value of all structures on the property. The insurance company will base your premium largely on what it would cost them to fully replace your home, garage, and other structures. Obviously, the larger your home and the more high-end materials used to build and furnish it, the more it will cost you to insure it.
Other considerations include:
- The exterior siding. Homes constructed with brick exterior will cost less to insure because they are less likely to suffer fire, hail or wind damage.
- Roof material and condition. Insurers will analyze how strong your roof is and the main material used to assess the likelihood of fire, wind, or storm damage.
- The age of the home. Older homes will typically require higher coverage levels because they can cost more to replace. They also may not have been built with the same safety codes and building materials of newer homes.
- The size and placement of your garage. Large garages and those detached from the home are more susceptible to theft. On the other hand, attached garages bring greater fire potential because items stored — vehicles, gas cans, etc. — are flammable.
- Fireplaces and wood stoves. Because they increase the risk of fire damage, the presence of fireplaces and wood-burning stoves will likely add to your insurance rates.
- Presence of safety features. Having working fire extinguishers, fire alarms, and a security system can reduce your premiums.
How the contents inside a property influences rates
Homeowners policies not only cover the property itself, but also the contents inside. This includes furniture, appliances, electronics, and clothing.
Insurance companies also set premiums based on your ownership of valuable items such as jewelry, collectibles, and artwork. These are expensive to replace in the event their damaged by fire or in a storm, as well as by theft or vandalism.
Insurance companies will also take note of items on the property that could injure a resident or guest. The most cited examples are trampolines and swimming pools because they can cause injury or worse. Some companies have gone as far as to deny or cancel coverage for properties with these types of items.
How you influence rates
Believe it or not, you as a homeowner may present risk to an insurance company.
One area underwriters will review is the number of previous claims you’ve made as a homeowner or renter. If you have filed multiple claims for small occurrences, you are considered a greater risk than a person who has never filed a homeowners claim. Too many claims may even lead to insurers dropping coverage on a homeowner.
Another characteristic about you that can impact your rates is what, if any, pets you own. Certain breeds of dogs, for example, are considered a greater risk to insure because they are more likely to bite or attack a family member or visitor.
Needless to say, every insurer has a unique approach to underwriting. To avoid the navigating this on your own, work with an independent insurance agent who can find the most cost-effective coverage for your needs.
Homeowners and renters insurance terms to know
The insurance industry is riddled with head-scratching terms and jargon. When it comes to protecting your property, here are the basic homeowners and renters insurance terms you should know.
Additional living expense
A policy with this provision will reimburse you for temporary living expenses (up to a certain limit) if you are displaced from your home.
This means that if two events happen at once, and one of those events, such as flooding, is not covered by insurance, then the policy might not cover damage from either event.
A temporary insurance policy issued by your carrier that provides proof of coverage until you receive a permanent policy.
Just like a rider on a life or disability insurance insurance policy, an endorsement is an add-on you can purchase for a homeowners insurance policy. (There are over 100 endorsements available.)
This is the amount you must pay for any damages or claims before your insurance coverage kicks in. For example, if your policy has a $500 deductible and you file a $1,500 claim, you will pay the first $500 and your insurer will cover the remaining $1,000.
This is the part of your policy that covers you against financial loss if you are sued or found legally responsible for another person’s injury or property damage.
Most homeowners insurance policies will pay claims based on what the cost will be to replace the damaged property, not necessarily its current value. For example, if your home and contents are completely destroyed by fire, a policy that pays replacement costs will pay for complete replacement of your home and contents, minus the deductible. Your policy, however, may have maximum dollar amount that it will pay on a claim.
If you're a resident-in-training, chances are you still rent. It's highly-recommended that you do so with a renters insurance policy in place.
However, upon entering professional practice many decide to become homeowners as well. To upgrade from renters to homeowners insurance, it helps to understand:
- What homeowners insurance covers vs. what renters insurance covers.
- The various factors that will influence your property insurance rates.
- Common terms and phrases you'll see when comparison shopping.
Clearly, homeowners insurance is a must-have. And for good reason. But as you can see, renters insurance is definitely worth considering as well.
No matter what your living situation is, it's crucial that you protect your hard-earned assets from life's worst-case scenarios.